Operational Risk – Foreseeing the Unforeseen Costs of Outsourcing

Vendor risk management is an ongoing process—one that begins with due diligence before a contract is signed and continues with monitoring throughout the length of the relationship. This blog series on the Top 10 risks will help you more effectively address how third-party vendor risk throughout every department in your financial institution.

#9 – Operational Risk

Sometimes it seems like nothing in life is simple. Even activities meant to streamline operations and improve efficiency and offerings—like outsourcing products and services to a third-party vendor—can be complicated and involve risk to the bottom line.

That’s why operational risk is one of the top 10 vendor management risks facing financial institutions. Operational risk is the risk of financial loss when processes, people or systems fail. Sometimes it’s the result of external events like a power outage, fire or flood. Other times it’s the vendor’s own internal issue, such as fraud, a hardware or software failure or an accounting error.

Operational risk can hurt a financial institution in many ways—from failed controls that cause a vendor to violate laws or regulations to poor management oversight. In fact, operational risk is the most encompassing vendor management risk—overlapping with every other form of risk on the top 10 list.

While it’s impossible to guarantee that processes, people and systems are perfect, there are steps FIs can take to mitigate these risks. The key is ensuring that vendors carefully and consistently follow suitable and effective internal controls.